Power Concern Offers California a Secret Deal

By JEFF GERTH and LOWELL BERGMAN

Published: May 2, 2001

Duke Energy, a power-generating company accused of overcharging customers millions of dollars during California's year-old energy crisis, has secretly offered Gov. Gray Davis a deal that it hopes will solve its legal problems while helping to calm the state's chaotic electricity markets.

The proposed settlement, outlined in documents prepared in March by Duke's lawyers, calls for an end to various state investigations, private lawsuits and state complaints to federal authorities accusing Duke of overcharging.

In return, Duke would make an unspecified ''appropriate payment'' but admit no wrongdoing.

''Duke is committed to sharing pain'' and ''expediting high-level confidential discussions that would embrace the governor's political and public relations needs,'' according to the documents, which were given to The New York Times by someone who wanted the issue aired publicly.

Governor Davis acknowledged the secret discussions in an interview in San Francisco yesterday, and said he hoped to meet with more generators soon. But he insisted that none of the companies would escape a substantial payment because, he said, they have penalized the state with excessive prices.

''My general approach to the energy companies is that you have already charged the utilities a 50 percent credit penalty for the power they were buying from you,'' Mr. Davis said, so ''you're going to have to have a very substantial reduction'' in what the companies are owed.

Mr. Davis said Duke had walked in with ''a number of demands,'' including an end to state inquiries but that that was not likely to happen.

''We're not about to call off the dogs,'' said the governor, a Democrat who will seek re-election next year.

Duke, based in Charlotte, N.C., is a major investor in California's wholesale electricity market, having spent more than $1 billion since the state opened its generating plants to outside operators in 1996.

It is also near the top of the list of companies accused of overcharging. Duke has been ordered by federal regulators to justify or refund $20 million in disputed charges this year, an amount that is third-highest among federally regulated companies in the California market.

By entering secret negotiations with Mr. Davis and being the first generator to settle, Duke could gain a public-relations advantage, in much the same way that the Liggett Group donned a white hat by being the first company to open talks with the state governments in the tobacco-litigation wars.

''We've just simply tried to be part of the solution,'' Richard B. Priory, Duke's chairman and chief executive, said in an interview, adding that the company was ''offering ideas'' and ''throwing in suggestions.''

Publicly, Mr. Davis has disparaged out-of-state electricity generators before and after he began talking with them privately. In an interview two weeks ago with The Los Angeles Times, he called the generators ''the biggest snakes on the planet Earth'' for their pricing practices.

California's electricity costs have risen to about $28 billion last year from $7 billion in 1999. By some estimates, they could approach $70 billion this year -- $2,000 for every resident. The state has stepped in to buy power for financially crippled utilities, including Pacific Gas and Electric, which is now in bankruptcy court.

The Davis administration has struck power deals with companies like Duke in hopes of securing a stable and affordable source of power. To pay those bills, Mr. Davis is seeking the largest municipal bond issue in American history, $12 billion, although some state officials privately estimate that the final amount will be higher.

The governor hopes the bond issue will eventually take the state's taxpayers off the hook. But how those costs are allocated among ratepayers, utilities and generators, and whether the bond issue can even succeed, remain unanswered questions. A major impediment to resolving the electricity crisis, according to state officials, utility executives and economists, is the secrecy surrounding the administration's negotiations.

Several Republicans have sued the Davis administration to learn the terms of specific contracts entered into by the state. On Monday, the administration released a 67-page financial analysis, including its most detailed disclosure about the overall costs of state electricity contracts. Last week Republicans blocked legislation that Mr. Davis says he needs to pass the bond issue. The bill could come up for a vote later this week.

''The thing that has hindered Governor Davis the most among the legislative ranks is the demand for secrecy over the negotiations and the agreements that have been reached,'' said Senator Joseph L. Dunn, a Democrat from Santa Ana and the chairman of a select committee investigating the price spikes.

Mr. Davis, in the interview, said there were legitimate commercial reasons for keeping contract terms confidential.

The political uncertainty has spilled over into the markets, where the bonds would have to be sold. The state's credit rating, while still solid, is slipping.